The Tax Cuts and Jobs Act (the “Act”) increased the federal estate tax exclusion amount for decedents dying in years 2018 to 2025. The act is set to sunset on December 31, 2025. The exclusion amount is for 2020 is $11.58 million. This means that an individual can leave $11.58 million and a married couple can leave $23.16 million dollars to their heirs or beneficiaries without paying any federal estate tax. This also means that an individual or married couple can gift this same amount during their lifetime and not incur a federal gift tax. The rate for the federal estate and gift tax remains at 40 percent.
There was concern that the sunset of the higher exclusion amount and reversion to the lower amount could, retroactively deny taxpayers who die after 2025 the full benefit of the higher exclusion amount applied to 2018-2025 gifts. This scenario has sometimes been called a “claw back” of the applicable exclusion amount. In November, the IRS issued new regulations that make clear that gifts made within the time period of the increased exemption amount used before death will not be “clawed back” into the decedent’s estate and subject to estate tax.
There are no 2020 changes to the rules regarding step-up basis at death. That means that when you die, your heirs’ cost basis in the assets you leave them are reset to the value at your date of death.
The Portability Election, which allows a surviving spouse to use his or her deceased spouse’s unused federal estate and gift tax exemption, is unchanged for 2020. This means a married couple can use the full $23.16 million exemption before any federal estate tax would be owed. To make a portability election, a federal estate tax return must be timely filed by the executor of the deceased spouse’s estate.
For 2020 the annual gift tax exclusion remains at $15,000. This means that an individual can give away $15,000 to any person in a calendar year ($30,000 for a married couple) without having to file a federal gift tax return.
Despite the large Federal Estate Tax exclusion amount, New York State’s estate tax exemption for 2020 is $5.85 million. This is a slight increase for inflation from the 2019 exemption of $5.74 million. New York State still does not recognize portability. New York still has the “cliff” meaning that if the estate is valued at more than 105% of the exemption amount ($6,142,500 in 2020) then the estate loses the benefit of the exemption and pays tax on the entire estate.
New York re-instated its short-lived elimination of the three-year lookback on gifts effective January 15, 2019. However, a gift is not includable if it was made by a resident or nonresident and the gift consists of real or tangible property located outside of New York State; while the decedent was a nonresident; before April 1, 2014; between January 1, 2019 and January 15, 2019; or by a decedent whose date of death was on or after January 1, 2026.
Most taxpayers will never pay a federal or New York State estate tax. However, there are many reasons to engage in estate planning. Those reasons include long term care planning, tax basis planning and planning to protect your beneficiaries once they inherit the wealth. In addition, since New York State has a separate estate tax regime with a significantly lower exclusion than that of the Federal regime it is still critical to do estate tax planning if you and/or your spouse have an estate that is potentially taxable under the New York State law. Learn more about estate planning here.